This is the third in a series of blog posts introducing Fordham's latest report, Halting a Runaway Train: Reforming Teacher Pensions for the 21st Century.
The financial crisis brought increased urgency to solving the pension crunch, but few groups in K-12 public education have found relief. As Michael B.Lafferty notes in Halting a Runaway Train,
?while the market crash caused much hand-wringing, it has, to date, brought about little fundamental change in the public-pension sector. A number of states took action to increase contributions to their pension plans, raise the retirement age, and/or fiddle with benefit formulas, but these actions merely nibbled around the edges of a gigantic problem.
But while examples of organizations that manage teacher retirement benefits finding solutions are rare, they are real. In particular, Halting a Runaway Train looks to creative states and charter schools that have made meaningful, if sometimes rocky, transitions away from defined-benefit (DB) retirement plans.
The Last Frontier changes first. While states like Nebraska and Michigan have cut back on DB plans for most public workers, legislatures have proven hesitant to extend those limits to teachers. Alaska, however, made the unprecedented move of replacing its DB plan with a defined-contribution (DC) plan for all new hires in 2005. Recognizing a widening gap between funds promised and allocated, legislators moved quickly and pushed the change through before opposition could organize. Alaska illustrates the advantages of swift action for reform, but the continuing controversy also demonstrates the risks of unilateral change.
Utah's unique solution. Utah offers a more nuanced example. Like Alaska, Utah's DB pension funds relied on unrealistic expectations for growth; the 2008 crash shattered those illusions and left the state retirement system with a $6.5 billion unfunded liability. Rather than mandate a straight DC plan, though, Utah chose to offer its new employees the choice between a DC option and a hybrid plan with DB and DC elements; Existing workers could transfer into the new plans or retain their DB pensions. Utah's hybrid plan represents an innovative compromise that caps employer contributions while maintaining retirement structures popular with employees.
Charter diversity. Earlier this year, the Fordham Institute examined how charter schools have addressed one of the trickiest topics in education in Charting a New Course to Retirement: How Charter Schools Handle Teacher Pensions. This creative sector once again offers valuable insights into the variety of ways that retirements can be managed sustainably. Looking at charters across the country, Halting a Runaway Train finds organizations handling their employee's retirements in very different ways, using both DB and DC plans, depending on their individual budgetary and human capital requirements.
Pension reform looked different in each example, highlighting the importance of flexibility and creativity in approaching such a complex issue. In each case, however, successful pension reform was predicated on long-term planning, careful evaluation of organizational assets and needs, and awareness of the political and economic landscape.
To learn more, download a copy of Halting a Runaway Train: Reforming Teacher Pensions for the 21st Century, and keep an eye out for upcoming responses and analysis of the report on Flypaper.
-Tyson Eberhardt
